This week, PIMCO, which manages the world’s largest private portfolio of U.S. government debt, published on its web site a paper by managing director Chris Dialynas entitled “Trouble Ahead, Trouble Behind,” which calls for the modern day equivalent of a reverse “Marshall Plan.” In deadly serious terms, the paper argues that America’s Asian creditors should forgive a portion of the debts owed to them by the U.S. government in exchange for the U.S. government imposing what amounts to a broad based austerity program, resulting in a substantial decline in American living standards. If debt forgiveness for what purports to be the world’s richest nation sounds absurd to you, then you haven’t really been paying attention to what is actually happening in the global economy.

The paper further proposes that America’s creditors would agree to this restructuring because in its absence, their eventual losses would be far greater, as the U.S. government would have no choice but to default on its sovereign debt. It is certainly self-serving that PIMCO advocates that debt forgiveness be limited to America’s foreign creditors, thereby exempting itself and its clients from shouldering any of the burden. The paper also maintains that a self-imposed austerity plan would benefit America, as it would likely be preferable to the far more draconian reforms that might be forcefully imposed from without.

In the absence of such a “Marshall Plan” the paper discusses several methods by which the U.S. might default on its debts. That the largest private manager of U.S. government bonds would even contemplate default is significant in and of itself; but that it could actually advocate it as policy, however, should be shocking. This raises the obvious question of what credit rating PIMCO believes U.S. government debt actually deserves? A triple A rating basically implies a zero probability of default. Since this paper argues that default is all but inevitable, it would imply that not only should U.S. sovereign debt not be AAA rated, but that it should fall into the category of junk.

However, while some at PIMCO may be contemplating the credit worthiness of U.S. government debt, the rating agencies themselves are asleep at the switch. Perhaps they are fearful of the potential political and economic ramifications that a downgrade of U.S sovereign debt might produce. It has always seemed a bit paradoxical that Japan, the world’s largest creditor, has a lower credit rating that the USA, its largest debtor. After all, if the U.S. government owes the Japanese government close to one trillion dollars, wouldn’t a Japanese government default imply that these bonds were worthless, meaning that the U.S. government had defaulted first?